Securities Regulation A, Securities Regulation B, Securities Regulation C
securities fraud
-Investors often have trouble proving common law fraud** can arise from failure to follow disclosure requirements, misleading information in the registration, most arise from information learned during later disclosure -check slide
Section 10(b)
-Section 11 of the 1933 Act -makes it illegal for any person "to use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe" -broadest base for securities fraud action
3 types of investment companies as defined by the ICA
-face-amount certificate companies, which issue debt securities paying a float return -unit investment trusts, which offer a float portfolio of securities -management companies, the most important type of investment company
SEC actions for securities law violation
-order corrected financial statements -recommend DOJ Bring criminal charges
Supreme Court Interpretation of Insider Trading
1980's- defendant is not a corporate insider who owes a fiduciary duty to shareholders (only responsible if his job precluded him from doing so) 1983- Changed in Dirks V SEC SCOTUS ruled there must be manipulation or deception and inherent unfairness involved
Sarbanes Oxley Act
2002 law requiring that the CEO and CFO of large companies that have publicly traded stock personally certify that financial reports submitted to the SEC comply with SEC rules and that the information in the reports is accurate. Knowingly making a misstatement is a criminal offense with fines up to $5M and 20 years in prison. The law also protects whistleblowers -established Public Company Accounting Oversight Board, which has authority to set accounting standards and discipline CPA's for misconduct -raised cost of listing stocks in the US
City of Livonia Employees Retirement System V Boeing Company
A class action suit was filed on behalf of everyone who bought stock in Boeing after Boeing was optimistic about the 787 -it later rose to attention that the dreamliner had technical problems, and the stock dropped 10% -suit dismissed -judgement affirmed because mere risks do not need to be stated when they could obviously occur
JOBS Act 2012 Crowd Funding
Allows crowd funding to fund public/private businesses -NOT Kickstarter -state exemptions for intrastate -max of $1M in one year -permit individual investors, over a 12 month period, to invest in the aggregate across all crowdfunding offerings up to: -if either their annual income or net worth is less than 100k, than the greater of $2000 or 5% of the lesser of their annual income or net worth -If both their annual income and net worth are equal to or more than $100k, 10% of the lesser of their annual income or net worth and during the 12 month period, the aggregate amount of securities sold to an investor through all crowdfunding offerings may not exceed 100k
A debt instruments specifies:
Amount of debt Length of the debt payment debt repayment method rate of interest charged to the sum borrowed
Under Howey, an investment contract exists where there is:
An investment of money in a common enterprise with an expectation of profits to be realized solely from the efforts of others.
In Howey, why would it matter that "company [was] accountable only for an allocation of the net profits based upon a check made at the time of picking." What other allocation formula might it have used and how might that formula have made a difference under the Howey test?
Calculating the profits on a net basis meant that each investor's profits depended on the performance of the entire enterprise, not just their row of trees. The company could have determined the profits on a row‐by‐row basis. This would have made the profits specific to each investor and reduced the element of commonality across all investors. Would this difference have changed the outcome? Is it commonality across all investors that matters, or would commonality between the issuer and investor be sufficient? As noted, this will be discussed later in the course.
Is this correct or, if not, why is it not correct: You can send a writing that includes all of the information required in a statutory prospectus except offering price and amount of proceeds of the offering.
Correct. This is a preliminary prospectus under rule 430. You can also omit: underwriting discounts or commissions, discounts or commissions to dealers, conversion rates, call prices, or other matters dependent upon the offering price.
Howey Test ********
Determines when an investment is a security 1.The investment of money 2.In a common enterprise 3. With an expectation of profits 4. Generated by the efforts of persons rather than investors
A dealer is not subject to section 5 once it sells out its allotment.
FALSE
Checks designated for purchases once the registration statement is effective can be accepted by underwriters and dealers during the waiting period.
FALSE
In Howey, if no one had accepted the offer, then there would have been no issue under the federal securities laws.
FALSE
The Securities Act requires the delivery of a prospectus prior to the investor's decision to invest.
FALSE
Under the SEC's access equals delivery approach, a sale does not trigger any requirement to deliver a writing because the registration statement is accessible on the SEC's website.
FALSE
An underwriter is not subject to section 5 once it sells out its allotment.
FALSE This will often be true, but not always. Once the underwriter sells all of its allotment, any future offers or sales would be made in its capacity as a dealer. A dealer is subject to section 5 for 25 days after the offering date for an IPO (rule 174), regardless of whether it has sold out its allotment before then. The statement is true for a reporting company because the dealer exemption is available immediately (rule 174 eliminates the 40-day period under section 4(3)).
Rule 134's accompanied/preceded by exception provides similar flexibility to the free writing exception under section 2(a)(10)(a).
FALSE A communication under the rule 134 accompanied/preceded by exception may include only the items in paragraph (a) and (b) of the rule. There is no content restriction on free writing.
For a writing to qualify under Rule 163A, you cannot already have drafted a registration statement.
FALSE As long as you do not file the registration statement for 31 days and you make reasonable efforts to prevent further distribution of the writing within 30 days prior to the filing, then Rule 163A would be available.
After the registration statement becomes effective, a preliminary prospectus still must precede any free writing prospectus.
FALSE The FWP must be preceded by a prospectus, but once the registration statement is effective, it must be the statutory (section 10(a)) prospectus. The preliminary prospectus would no longer satisfy the preceded/accompanied by requirement.
Rule 430A allows sales to be confirmed the moment that the issuer and underwriters have settled on final pricing terms, without the SEC having first declared the prospectus effective.
FALSE The first part is correct. The second part is slightly off. The SEC must declare the prospectus effective before sales can be confirmed. What rule 430A allows is for the prospectus to be declared effective before it has been amended to include the final pricing information.
After the delaying amendment has been lifted, the registration statement becomes effective in 20 days.
FALSE The registration statement becomes effective immediately under the SEC's exercise of its authority to accelerate effectiveness.
Under 163A, you cannot include financial projections.
FALSE There are no content restrictions under Rule 163A.
The SEC uses its authority to accelerate the effectiveness of a registration statement and rule 15c2-8 to require that investors read a prospectus before making the decision to invest.
FALSE These are the mechanisms that the SEC uses, but not to require the reading of the prospectus. They require only that prospectuses are easily obtainable for non-IPOs and actually delivered for IPOs.
who governs exchanges on the stock market?
Financial Industry Regulatory Authority -17,000 brokerage firms -1.3M brokers -also SEC
The Investment Company Act (ICA) of 1940
Gives the SEC control over the structure of investment companies. Requires them to register as such with the SEC and be subject to regulations regarding operations and holds them liable to the SEC, and to private parties, for violations -companies under the ICA are subject to disclosure requirements of the SEC for publicly traded securities
What facts militate for treating the sale of the property and the sale of the service contract together? Would it matter if only 1% of the purchasers of the property also had bought the service contract?
In theory, the offer of the property and the service contract together constituted a security. Whether something is offered or sold has no bearing on whether what is offered or sold is a security. As stated by the Court, "it is enough that the respondents merely offer the essential ingredients of an investment contract." Do you buy that? During the relevant period, 42 of 51 purchasers of property also bought the service contract. Would the Court really have reached the same decision if only 1 out of 52 had bought the service contract? Remember that the fact that the "offer" of a security can violate the securities laws, which obviously contemplates violations occurring with respect to things that are not actually sold. In this case, however, is it likely that there would have to be a material number of investors buying the property and service contract together to find that it was a security?
Is this correct or, if not, why not: A free writing prospectus can only include information that is in the filed registration statement.
Incorrect. Rule 433(a) provides that the FWP can include information not contained in the registration statement, but if the information is material, then it should have appeared in the registration statement, so the information is effectively limited to non-material information. The information also cannot contradict the registration statement.
Latta V Rainey
Mobile Billboards of America sold billboard investments -sold billboard investments -investors could buy a 20k billboard leased for 7 years and at the end of 7 years MBA would buy back the billboard and return the initial investment for an average return of 13.5% annually -civil liability for securities fraud -affirmed
securities exchange
NYSE for example
US SEC V Ginsburg
Scott Ginsburg was CEO of Evergreen Media -Met with EZ Communication to discuss merger -told his brother and dad, who bought stock -they made $1M -SEC sues for securities violation, ordered him to pay $1M in penalties -trial judge sets aside verdict saying not enough evidence exists to show insider trading
blue sky laws
State securities laws -named to prevent securities being sold backed by nothing but "blue sky"
The following are permitted written offers during the post-effective period (mark all that apply):
Summary Prospectus Section 2(a)(10)(a) Free Writing Section 10(a) Statutory Prospectus Rule 169 Facts Preliminary Negotiations and Agreements with Dealers Emerging growth company determinations of interest
A dealer is generally someone who is in the business of offering, selling and buying securities.
TRUE
A free writing prospectus must include a legend.
TRUE
An underwriter is a person who purchases a security with a view to its distribution.
TRUE
Section 5(a) prohibits sales prior to the effectiveness of the registration statement.
TRUE
Section 5(b)(1)'s prohibition against written offers does not apply to communications that: are excluded from being "offers" or "prospectuses", qualify as section 10 prospectuses.
TRUE
The free writing prospectus generally must be filed.
TRUE
The preliminary prospectus is the most commonly used section 10 prospectus.
TRUE
Rule 15c2-8 requires that underwriters and dealers deliver a copy of the preliminary prospectus at least 48 hours before the purchaser receives the confirmation of the sale.
TRUE If the purchaser has already received a current preliminary prospectus, then no additional action is needed under this requirement.
If an interest in a business is a security, then the failure to register its to put (sell) the security back to the issuer at its offering price.
TRUE Note that the "may" here is key. Not all securities are required to be registered. If something is a security and it is required to be registered, the failure to register has onerous consequences. The remedy is rescission, and the plaintiff need only prove a failure to register. No scienter or misrepresentation need be alleged.
The free writing prospectus cannot be used unless a price range has been provided in the filed registration statement.
TRUE Rule 433(b)(2)(i).
Sales are prohibited prior to the effectiveness of the registration statement.
TRUE Section 5(a).
Section 5(b)(2) prohibits the mailing of the securities unless preceded or accompanied by a section 10(a) prospectus.
TRUE Section 5(b)(2) does not come into play because virtually all securities are held in book form. Stock certificates are no longer used, much less mailed.
Under Rule 163A, you can send the writing to 5000 brokers.
TRUE There are no distribution limits provided that you make efforts to prevent further distribution within 30 days of filing.
Under Rule 163A, the writing can include information that is being distributed for the first time.
TRUE There is no requirement that the information have been disseminated previously, much less on a regular basis.
No additional delivery requirement is triggered by the delivery of a transaction confirmation because the confirmation is exempt from section 5(b)(1).
TRUE Transaction confirmations are exempt from section 5(b)(1) under rule 172. Although rule 173 requires delivery of the final prospectus or a notice in lieu thereof, this delivery requirement is not triggered by the delivery of the confirmation. It exists independent of the delivery of the confirmation or any other writing.
s the sale of real estate the sale of an investment contract? Why or why not? Apply the Howey test.
There is an investment of money with an expectation of profit. Are the profits derived solely from the efforts of others? No. Although the profit may result entirely from the initial identification of the investment property by the seller, no efforts are made by the seller after the investment is made. Is there a common enterprise? Where is the commonality? Between the seller and the buyer? Between the buyer and other buyers? I.e., must there by other buyers to satisfy the "common enterprise" prong? We will address the subtleties of the "common enterprise" prong ‐‐ about which there is much legal uncertainty ‐‐ in our first class.
Regulation D
To explain what qualifies as a private placement exemption , the SEC adopted Regulation D. Such offerings must only be made only to accredited investors. Investors are deemed to be sophisticated/wealthy enough to evaluate investment opportunity without an SEC approved prospectus -individuals must have an annual income of 200k (300k couple) or be worth $1Million 504-under $1m wishing a year 505-under $5m within a year 506-over $5m within a year p.537
Securities
Usually either a debt (typically money borrowed by a corporation usually as note or bond that can be traded or Equity such as common stocks that can be traded -provide capital for businesses -can be paper or in a computer
material information
all relevant information that an investor would want to know about a company- its background, its executives, and its plan of operation.
Securities Litigation Reform Act of 1995
amended the law to protect companies from liability for protections abut profits and the likely success of the company, so long as forecasts are accompanied by "meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward looking statement." -called a safe harbor because it gives greater immunity from suit for corporate forecasts that turned out not to be accurate after the fact, but were made with disclaimers
Securities and Exchange Commission (SEC)
bipartisan agency tasked with enforcing and administering federal securities laws 5 members appointed by president for five year terms 1 chairman
debt securities
bonds traded on the securities market -can also borrow notes from large lenders, the notes can then be traded making them securities
filling orders
can be done if the stockowners want to sell at a price higher than market value if the price eventually hits that number
securities exempt from regulation
debts issued by a fed, state, or local government -not subject to registration requirements of the federal securities statutes -issued by banks, religious/charitable orgs -annuities
Investment Advisors Act
defines the investment advisor as a "person who, for compensation, engages in the business of advising others..... as to the advisability of investing in, purchasing, or selling securities." -have a fiduciary duty with respect to the receipt of compensation for services -regulates brokers, dealers, advisors *****
Rule 144A
exempts US and Foreign security issuers from registration requirements for the sale of bonds and stocks to institutions with a portfolio with at least $100 million in securities -can trade these to similar institutions without registration or disclosure requirements
t/f the SEC rules on the merits (potential success) of a proposed business
false, but it can require high risk factors to be clear in the prospectus
t/f a ford stock owner can walk into ford and demand a truck equal in value to his stock
false, only entitled to potential future earnings of stock
Insider Trader Sanctions act of 1984
gave the SEC authority to bring enforcement actions against violators who trade in securities while in possession of a material, nonpublic information -strengthened by the Insider and Securities Fraud Enforcement Act of 1988 (fine of $1M for persons or 10 years per violation AND raised to $5M per willful violation and corporations may be fined $25 million for non-willful violations p.546
Rule 10-5B
illegal in any way to: 1.Employ any device, scheme, or artifact to defraud 2. To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or 3. To engage in any act, practice, practice, or course of business which operate as a fraud deceit upon any person, in connection with the purchase of a sale of any security -applies to all securities whether registered or not -used to prohibit insider trading
churning
illegal; occurs when the broker sells excessive amounts of stock to make money off of transactions
Dodd-Frank
increases regulatory oversight of financial markets -trading of derivatives under much more scrutiny -
investment companies
invests and trades in securities
private company
less than 500 shareholders and does not allow its securities to be openly traded -financial information not available to the public
misstatements
misleading statements and material admissions in securities regulation material -persons affected may sue
Regulation S-K
more detailed information than the prospectus -more info about finances, past experience of the issuers
mutual fund
most common investment management company -offer no specific amount of shares and can expand as long as people invest with them ("open-end") -price of the shares is equal to the value of the portfolio divided by the number of shares sold to the public -load/no load mutual funds -load has a commission of some % -No load funds are sold directly sold to the public with no sales commission
Well-Known Seasoned Issuers WKSI
most securities issued by these -previously have offered $1B in debt securities -or have a public equity market capitalization of at least $700M -can file a registration the day a new offering is available -can shelf register (k=continually update the prospectus online) -can sell at any time within the next 3 years
OTC
over the counter trading? -IBM issues private bonds for example -not public until deal is finalized p.538
dealers
people who buy and sell securities for their own account
brokers
people who make deals in securities for the account of others
private placements
placing large blocks of securities with institutional investors (qualified institutional buyers) rather than offering the bonds to the general public
prospectus (called schedule A)
registration statement to help investors evaluate a security -first version of the prospectus not yet approved by the SEC is called a red herring -the security issuer's finances/business -the purpose of the offering -the plan for the funds collected -the risks involved with the business venture -the promoters' managerial experience and financial compensation -financial statements certified by independent public accountants
Securities Act of 1933
regulates the public offerings of securities when they are first sold -corporations
Securities Exchange Act of 1934
regulates trading in existing markets and imposes disclosure requirements on corporations that have issued publicly held securities
Regulation FD
requires public companies to release material information to the public rather than reveal such information selectively
Securities Litigation Uniform Standards Act of 1998
requires securities suits involving nationally traded securities to be brought exclusively in federal court under federal law -the act prohibits class action suit if the suit alleges: 1) an untrue statement or omission of a material fact in connection with the purchase or sale of a covered security; or 2)That the defendant used or employed any deceptive device or contrivance in connection with the purchase or sale of a covered security
conflicts of interest precautions
rules on who may be on board of directors for investment companies -74% of members on the board must be outsiders (no direct business relationship with the company or its officers) -investment companies may not use investment funds for deals with any persons affiliated with the company
equity financing
selling company stock to grant shareholders an ownership interest in the company -company has no obligation to repay shareholders they amount they have invested -can usually be traded on the stock exchange
exemption from registration
some securities may qualify for this, but only for the initial sale
tender offer
stockowners in the target company are offered stock in the acquiring company or cash in exchange for their stock. If successful, the acquiring company obtains enough stock to control the target company -must be registered with the SEC, procedures must be followed -like a "hostile takeover"
insider trading
the buying or selling of stock by persons who have access to information affecting the value of the stock that has not yet been revealed to the public -affects Wall St the most
t/f SEC may pay bounties- up to 10 percent of the penalty the government receives
true
t/f a company can go from public to private by buying up its shares so it is held by fewer than 500 shareholders
true
t/f a merril lynch analyst who covers Intel may not buy and sell that stock while making recommendations about it to clients of Merrill Lynch
true
t/f any company that issues traded securities is publicly held company and is subject to reporting requirements
true
t/f banks and insurance companies are accredited investors
true
t/f executives in a firm may trade stock in their company and not be liable for insider trading if they contracted at an earlier date to have another person buy/sell the security at a certain time or at specific time intervals
true
t/f filing a registration statement with the SEC fulfills disclosure requirements.
true
t/f most shares of stock also carry voting rights to elect boards of directors and to determine the responses to major issues facing the company
true
t/f the supreme court has held that broker-dealers must make known to their clients and possible conflicts of interest and may not charge excessive markups
true
t/f when investors establish accounts with investment firms or stockbrokers, they usually sign a standard form compelling arbitration
true
t/f government bonds are exempt from securities laws
true, but only the initial sale
registration statement for a security
two parts -prospectus, a document providing the legal offering of the sale of the security -detailed information required by the SEC -becomes valid 20 days after being filed -expensive, usually hire an underwriter
scalping
when a professional buys stock for personal benefit, and urges clients to do so, thus increasing the stock price
